The road to recovery

By Kevin Rudd

25 July 2009 — 12:00am

WHEN Australia last experienced a global recession worse than the current crisis, Jim Scullin and Joe Lyons were prime ministers of Australia, Don Bradman had just begun his Test cricketing career and Charles Kingsford Smith had just made his first flight across the Pacific. Of Australia's current population of 22 million, only 1 million of our number were alive to experience the traumatic impact of the Great Depression.

In its response to the current global recession, Australia has sought to learn some lessons of recessions past. To cushion the impact, the Government took strong, early and decisive action through the Nation Building for Recovery plan to support jobs, small business and apprenticeships today by investing in infrastructure for tomorrow.

The alternatives were to do nothing or, worse, effectively replicate the Premiers' Plan of 1931 when governments cut expenditure, thereby compounding the problems created by a private sector already in retreat. The result, of course, was an economic rout, appalling unemployment and a decade of negligible growth through the 1930s.

By contrast, the economic data today suggest the Government's plan is working so far. Australia is performing better than most other economies, with the fastest growth, the second-lowest unemployment and the lowest debt and deficit of all the major advanced economies. And we remain the only advanced economy not to have gone into recession.

The economic recovery, however, will be a long, tough and bumpy road with many twists and turns. We will still see rising unemployment, even after the recovery gets under way, because it takes a long time for positive sentiment to flow through to positive investment and to positive employment. Moreover, as the recovery unfolds, most economists believe that we are likely to see interest rates moving up again from record lows. As the recovery strengthens, the Government will implement its plan to return the budget to surplus, which will mean tough decisions, unpopular decisions and budget cuts.

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Just as it was necessary for the Government to borrow and to stimulate the economy while the private sector was in retreat, so too is it necessary for the budget to be brought back to surplus over time, once the economy recovers and the private sector expands. Responsible, conservative economic management is about both these things.

Based on these continuing fiscal disciplines, we must also begin to build for the decade ahead, building a sustainable growth strategy for Australia's future.

In the past, Australia relied almost exclusively on the rollercoaster of the boom and bust of the mining sector on the stockmarket. Instead, Australia needs to build stable foundations for growth by reforming the economy to enhance long-term productivity growth, the only reliable driver of long-term improvements in national living standards.

That's why Australia must embark upon a Building Decade, implementing a plan of nation-building for the future, unapologetically based on the sure foundations of continuing conservative economic management.

It will take time to build the foundations of Australia's long-term global competitiveness. But we must take time to do it thoroughly. We must take time to invest in the infrastructure of the future, the skills of the future, the competitive tax system we need for the future, an ambitious agenda for competition and regulatory reform, and to maintain the best national balance sheet of major advanced economies.

If we succeed, we will have built in the decade ahead an Australian economy on rock-solid foundations for the future, rather than one that rests primarily on the shifting sands of international fortune. The purpose of this essay is threefold: to review progress in dealing with the immediate crisis; to look beyond the immediate crisis to outline challenges likely to arise during recovery; and to define the core economic challenge for the decade ahead, the "Building Decade", as we embrace a bold strategy to boost Australia's long-term global competitiveness.

CAUSES OF THE CURRENT CRISIS

The roots of the crisis lie in the preceding decade of excess. In the past decade, the world enjoyed an extraordinary boom. Living standards rose faster than at any time in recent memory. Global economic growth reached a peak of 5.1 per cent in 2007, the highest global growth rate in more than three decades.

HOWEVER, as we later learned, the global boom was built in large part on a three-layered house of cards.

First, in many Western countries, the boom was created on a pile of debt held by consumers, corporates and some governments. As global financier George Soros put it: "For 25 years [the West] has been consuming more than we have been producing … living beyond our means."

In the United States, in particular, consumers went on a long, debt-fuelled shopping spree. Household debt rose from about 65 per cent of income in 1983 to nearly 140 per cent of income by 2007. Commentator Bill Gross summarised the US consumption boom as: "For too long it's been McHouses, McHummers and McFlatscreens, all financed with excessive amounts of McCredit … What a colossal McStake."

Australian consumers also spent up big. Between 1996 and 2007, there was a 460 per cent increase in credit card debt, a 340 per cent increase in household debt, a 450 per cent increase in corporate debt and a 200 per cent increase in net foreign debt.

Second, these debts were racked up on the back of skyrocketing asset prices. In several countries, stock prices and house values soared far above their true long-term worth, creating paper wealth that millions of households used as collateral for their growing debts. The value of global financial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007. Of course, this bubble was fed by a regulatory system that encouraged excessive greed. Weak financial regulation allowed corporate cowboys to take on dangerous financial risks that began to threaten the financial system itself.

In the US, regulatory restrictions that prevented commercial banks from taking excessive risks were repealed by Congress in 1999, allowing millions of small depositors to be exposed to risky speculation. And in 2004, the US Securities and Exchange Commission allowed banks to massively increase their debt levels.

This combination of weak regulation and excessive greed produced an unsustainable boom in asset prices and financial markets. The finance industry's share of total corporate profits increased from less than 10 per cent in the 1950s to 28 per cent in 2005. From 1980 to 2007, the average remuneration of US investment bankers increased from roughly the equivalent of employees outside the finance industry to roughly four times the average. The finance sector, rather than servicing the needs of the real economy, began to primarily service itself.

The final layer of the house of cards was the huge volume of money funnelled from China, Japan and the Middle East to Western banks and governments. Cheap savings from the East flooded into the West to finance ballooning deficits. From 1999 to 2006, the US current account deficit more than tripled, from $US63.3 billion to $US214.8 billion, balanced by huge surpluses in other countries, especially China.

In 2007, this house of cards began to collapse. Asset prices fell, then credit dried up, then growth disappeared, then unemployment skyrocketed. The result: the global economy will shrink for the first time since World War II. Unemployment queues will have grown by up to 50 million people in less than a year.

GOVERNMENTAs the crisis took hold, responsible governments around the world were forced to step in to stabilise fractured financial markets and to support growth and jobs through unprecedented fiscal stimulus.

INTERVENTION

GOVERNMENTS around the world have implemented taxpayer-funded government guarantees for banks amounting to $6.2 trillion, or 8 per cent of global GDP. In countries where it has been necessary to save financial institutions from collapse, governments have allocated a further $2 trillion to fund bank bail-outs, recapitalisations and nationalisations. On the fiscal front, governments from the world's largest 20 economies are expected to collectively pump about $US5 trillion into their economies by the end of next year (or nearly 8 per cent of global GDP since the crisis began). Altogether, the measures are the equivalent of an extraordinary and unprecedented 18 per cent of global GDP.

In the first 12 months of the crisis, the world's central banks reduced official interest rates to record lows, less than 1 per cent in many countries.

Collectively, these government policy actions — fiscal, monetary and financial — amount to the largest and most co-ordinated government stimulus strategy in modern economic history.

We have already begun to see the results. Early signs of "green shoots" have emerged in recent economic data. And this month, the International Monetary Fund revised up its forecast for the global recovery, from 1.9 per cent to 2.5 per cent growth next year. An IMF report this month noted "the world economy is stabilising, helped by unprecedented macroeconomic and financial policy support". The truth, however, is the world is still a long way from recovery.

In the budget, the Government forecast global growth in 2011 of 3.5 per cent, significantly below the peak growth rate just before the crisis.

In Australia, the Government acted early and decisively to cushion the worst impacts of the global crisis. The Government moved quickly in October last year to implement, for the first time in Australia's history, a guarantee for the security of all 15 million Australian deposit-holders.

The Government also provided for the first time a guarantee for our banks' wholesale funding to keep the international lines of credit open. Both these measures helped to stabilise financial markets and maintain confidence in our banking system.

In addition, the Government has acted to stimulate the economy through a $77 billion strategy of Nation Building for Recovery, equivalent to 6.4 per cent of GDP over the next four years. The central organising principle of the strategy has been to support jobs, small business and apprenticeships today by investing in the nation-building infrastructure the country needs for tomorrow.

Seventy per cent of the total direct investment under this strategy has gone to infrastructure. This includes medium-term infrastructure such as the largest school modernisation program in Australia's history. And long-term infrastructure including road, rail, ports, clean energy projects, universities, TAFEs, hospitals and medical research, and the implementation of a National Broadband Network. All these investments are designed to lift long-term productivity growth.

The third arm of the Government's intervention strategy has focused on the labour market. With unemployment rising, the strategy has been to reduce the unemployment impact by, on the one hand, direct stimulatory measures and, on the other hand, deploying 712,000 productivity training places to support those who have lost their jobs or cannot enter the labour market.

The Government has done this with what it describes as a Jobs and Training Compact with Australia, a Compact with Young Australians so that anyone under the age of 25 must be earning or learning, a Compact with Retrenched Australians that provides them with training places in preparation for the recovery, and a Compact with Local Communities, driven by a $650 million local jobs fund and priority employment co-ordinators in the 20 most acute unemployment regions.

These measures are aimed at reducing job losses to an absolute minimum while doing everything possible to avoid the "lost generation" of Australians who failed to re-enter the labour market after previous recessions.

THE COST OFInevitably, interventions by governments worldwide have come at a cost of increased deficits and public borrowing.

INTERVENTION

THE average budget deficit for OECD economies increased more than sixfold, from 1.4 per cent of GDP before the crisis in 2007 to 8.8 per cent of GDP in 2010. Public borrowing is required to finance these deficits and is expected to increase from 73.5 per cent of GDP in 2007 to 100.2 per cent in 2010. Among the big advanced economies, net debt will increase from 52 per cent of GDP in 2007 to 79 per cent in 2010.

Australia's deficit and debt position has inevitably been affected, albeit much less than in other advanced economies. The combined effects of collapses in revenue ($210 billion) and policy interventions to support our economy ($77 billion) are expected to result in a deficit that peaks at 4.9 per cent of GDP in 2009-10. Net public debt is expected to rise to 4.6 per cent of GDP this financial year and peak at 13.8 per cent of GDP in 2013-14. Both are the lowest by an order of magnitude of all major advanced economies.

Clearly, government global action has come at a cost. But as the IMF argued earlier this year: "While the fiscal cost for some countries will be large in the short run, the alternative of providing no fiscal stimulus or financial sector support would be extremely costly in terms of the lost output." Without government intervention, global growth, global unemployment and prospects of global financial recovery would be much, much worse.

THE IDEOLOGICAL HYPOCRISY OF THE RIGHTAs I have argued elsewhere, the boom-and-bust economic cycle of the past decade has been an unavoidable consequence of a decade of neo-liberal free

market fundamentalism that reinforced a culture of corporate greed and excess in the financial sector.

THE central principles of this extreme form of capitalism are that markets are self-regulating, that government should get out of the road of the market altogether and that the state itself should retreat to its core historical function of security at home and abroad.

This fundamentalist ideology of self-regulating markets has imploded comprehensively with the current crisis. We have seen in the crisis spectacular market failure requiring equally spectacular government intervention in the economy to effectively save the system from itself.

Notwithstanding their support for the extreme free-market policies that have underpinned much of the crisis, the neo-liberals of the political right now refuse to accept any form of political responsibility for the fruits of their own ideological handiwork, the current global recession.

Second, they attack the range of policies that have been put in place by governments of the responsible centre to deal with the consequences of the crisis, in complete denial of the impact of the resulting recessions on the jobs of working Australians.

Third, they mount the remarkable argument that because there are tentative signs of global economic recovery (and in Australia's case that we are doing better than most other economies), none of the national and global interventions that have underpinned this improved performance were necessary in the first place.

Having promulgated for the past quarter-century an ideology of free-market fundamentalism directly linked to the causes of the current crisis, the political right now attacks governments of the responsible centre for the fiscal and policy interventions made necessary by the consequences of that fundamentalism. This is opportunism writ large.

In Australia, the political right's dishonest scare-campaign on debt and deficit is of a similar type. In addition to the above, the Australian political right also chooses to ignore two additional and inconvenient truths.

First, the right has publicly confirmed it would fund 93 per cent ($267 billion of the $287 billion) of debt and deficit funding proposed by the Government. Second, the right ignores the radically different revenue circumstances of the mining boom of the past. From 2004-05, the mining boom delivered $334 billion in extra Commonwealth revenue. The global financial crisis led to a $210 billion decline in revenue, the largest fall in Australia's history.

The Government's fiscal strategy is a responsible response by a centrist government to reduce the impact of global recession. Since the budget, Australia's sovereign credit rating has been reaffirmed as AAA, the highest for government finances. Furthermore, the Government's fiscal strategy has helped our economy, keeping Australia out of recession, and according to Treasury forecasts, ensuring that about 200,000 people who would have otherwise lost their jobs remain employed.

THE NEW CHALLENGES OF RECOVERYThe first phase of Australia's response to the global crisis has legitimately focused on crisis management, emergency interventions and implementing a strategy for recovery.

BUT we must now deal with two challenges that arise in the context of a possible recovery.

We must begin to plan for a properly globally co-ordinated withdrawal of the extraordinary interventions we implemented in the first phase of the crisis.

As I recently outlined in an address in Berlin, global co-ordination will be crucial to an orderly and successful exit from the fiscal and financial market interventions that governments have embraced, just as co-ordination was necessary in their implementation. There is a strong rationale for the G20 to play a leading role.

But it is a delicate balancing act. An early withdrawal of stimulus can endanger confidence and economic recovery. I spoke earlier of positive IMF forecasts for 2010, but never forget it forecast a 1.4 per cent contraction this year. Co-ordination and caution among economies are essential.

The second new challenge is to build the foundations of sustainable growth. It begins with recognising the source of our future growth cannot be the same as for past growth.

This crisis has shown we have reached the limits of a purely debt-fuelled global growth strategy. Not only will the neo-liberal model of the past not provide growth for the future, its after-effects will make recovery more difficult. Mountains of global public and private debt, global imbalances, and a weakened global financial system will drag on global growth for a long time.

As world-renowned financial columnist Martin Wolf has written: "Those who expect a swift return to the business-as-usual of 2006 are fantasists. A slow and difficult recovery, dominated by de-leveraging and deflationary risks, is the most likely prospect."

GLOBAL POLICYThese new challenges of timely exit and sustainable recovery will require co-ordinated global and national responses.

THE major economies must work together on the orderly and stable exit from extraordinary fiscal and monetary policy stimulus; the co-ordinated unwinding of the global savings and investment imbalances that developed between the surplus countries in the East and deficit countries in the West; as well as the co-ordinated reduction and removal of the emergency financial market interventions put in place (for example, bank guarantees) and their replacement with a new, transparent, consistent regulatory regime for the future global financial system.

Through the G20, the global community needs to establish a process to co-ordinate exit from temporary stimulus for when the time is right.

The world faces a significant challenge rebalancing the global economy. For the past decade or more, many Western countries simply consumed too much, living beyond their means and racking up debts from those countries that saved too much.

The Obama Administration is working hard on strategies to rebalance global growth and deliver a more sustainable global economy. The director of the US President's National Economic Council, Larry Summers, said recently the US economy of the future will need to be "more export-oriented" and "less consumption-oriented". US Treasury Secretary Tim Geithner said, "Americans must save more and other countries in the world should direct themselves towards a development [that is] more focused on their domestic demand … Our growth model must be more balanced and more stable."

At the same time, surplus countries need to rebalance their economies. They will have to sell more of their own products to their own populations rather than rely on consumers in foreign countries absorbing excess outputs.

Some East Asian countries need to broaden their social security and health systems so their people can feel more secure about their own futures and shift from savings to consumption. This will not happen overnight but must be part of a re-balancing of global finances.

The G20 could and should play a leading role in this rebalancing. This should also involve a reform of the institutions of global economic governance (in particular, the IMF) so that emerging economies do not fear a repeat of crises like the Asian Financial Crisis a decade ago — when punitive action by the IMF and the flight of short-term capital caused many economies to accumulate massive foreign reserves for the future to guard against future external vulnerability. This has happened at the expense of implementing measures that would enhance domestic demand.

The third element of a sustainable growth model for the future is the reform of the global system of financial regulation to restore confidence to investors.

In large part, the G20 already has commissioned this work through the Financial Stability Board, although there remains a challenge of global political will to give effect to FSB recommendations after G20 leaders next meet in Pittsburgh in September.

A SUSTAINABLE ECONOMIC STRATEGY FOR AUSTRALIAFor Australia, the challenges of a slower global recovery and an uncertain post-crisis global financial order mean we cannot simply rely on the return of favourable global economic conditions to underpin our future prosperity.

BUT this does not mean we should accept that growth has to be lower, or that we should reduce our aspirations. Just because the global economy will be tough, we must not accept lower growth as inevitable. The budget forecasts growth over the next economic cycle at roughly the same average level as growth over the last cycle. This will only be achieved through a responsible agenda of future economic reform.

Australia will need to work smarter and harder to achieve better national growth in a weaker global environment. We need to implement a global competitiveness agenda for Australia that reinvigorates the drivers of productivity growth. Our mission must be a more globally competitive Australia capable of securing a greater slice of what may well be a more sluggish global economy.

To ensure the next decade of prosperity is more sustainable than the last, we need today to begin laying the foundations for a stronger, more productive and more competitive Australia. As leader of the Opposition, I often posed the question: what does Australia do if and when the mining boom ends? The then government ridiculed the possibility. Our answer then and now is that we must prepare for an Australia beyond the mining booms, and we must build a new national growth strategy whose central organising principle is strong productivity growth.

AUSTRALIA'S NEW GLOBAL COMPETITIVENESS STRATEGYAustralia's future prosperity will rely on our willingness to make tough decisions, to tighten our belt as the economy recovers and to build our global competitiveness.

THE Government strategy for this competitiveness is anchored in sound public financial management, a new productivity agenda, and action on the full range of long-term structural challenges, including retirement incomes policy, the ageing of the population and climate change.

First, we must maintain strong public finances. This means over time returning the budget to surplus and paying down public debt.

The Government has committed to holding growth in real government spending to 2 per cent a year when higher growth levels return, allowing the tax base to recover with the economic cycle. The Government has also committed to, on average, keeping tax as a share of the economy below the level we inherited. The IMF observed last month: "The Government's commitment to return to surpluses and achieve a positive budget balance on average over the medium term is commendable. Few other advanced countries have adopted such a clear commitment."

To ensure government spending is sustainable and to make room for priority areas such as pensions, the Government has delivered more than $55 billion in savings over the past two budgets. This prudent, responsible strategy is expected to halve the deficit by 2012-13 and return the budget to surplus by 2015-16.

This strategy will involve tough choices and require Australians to accept difficult and unpopular budget cuts. It is also the fiscal framework within which the Government will consider other long-term reform imperatives including health. But this strategy is essential to ensure Australia retains the strongest budget and balance sheet of all major advanced economies.

Second, the Government has embarked on long-term economic reform, essential to deliver new growth based on productivity rather than ever-rising private and corporate debt and cyclical windfalls from mining booms entirely captive to global factors beyond our national control.

By improving economic efficiency, microeconomic reform can drive the productivity gains essential for better living standards and long-term economic growth. Productivity growth is the only way of increasing per capita income without increasing physical inputs or relying on terms of trade booms. As Nobel prize winner Paul Krugman said: "Productivity isn't everything, but in the long run it is almost everything."

Unfortunately, productivity in the Australian economy has been flat over the past decade. Microeconomic reforms, such as tariff reform, labour market reform, and competition policy reform, undertaken in Australia in the 1980s and 1990s, were the principal underlying drivers of the surge in productivity growth in the late 1990s. Productivity growth through the 1993-94 to 1998-99 productivity cycle averaged 3.3 per cent a year.

This was the highest labour productivity growth of any cycle on record in Australia, widely attributed to the raft of microeconomic reforms introduced during the Hawke and Keating governments.

Our productivity performance has been slipping since. Annual labour productivity growth in the 1998-99 to 2003-04 productivity cycle fell to 2.2 per cent. But in the current productivity cycle, labour productivity growth has slowed to an average annual rate of 1.1 per cent, just half the long-run average.

Australia cannot sustain strong economic growth unless it lifts its productive capacity. It cannot sustain ongoing improvements in living standards unless productivity growth improves. And Australia cannot meet the challenges of raising our global competitiveness if we do not lift productivity growth. The reform needed to return to a higher productivity path is not easy, nor is the road map a simple one. The Government has targeted five key areas to boost productivity.

POOR regulation, however, can damage wealth creation, stifle business innovation, and hamper our ability to deliver core public services. Efficient regulation strikes a balance that encourages competition but protects employees, consumers, small businesses and macroeconomic stability. That's why the Government has launched a comprehensive regulatory reform agenda under COAG.

INFRASTRUCTUREWe need to ensure we have the infrastructure networks capable of facilitating export expansion as global demand recovers.

THE critical economic infrastructure investments we are making will not only support jobs and growth today, but will enhance our long-term productive capacity.

We need world-class infrastructure to move Australia to a more diverse, competitive and sustainable economy that creates social, economic and environmental benefits in the long term.

We cannot afford bottlenecks constraining our economic growth potential as they did during the mining boom.

Freight carriage volumes are expected to almost double by 2020. We cannot allow Australia's future productive capacity to be held back by inadequate and ageing infrastructure. Better infrastructure planning, regulation, governance and incentives all have a role to play in future infrastructure reform.

In consultation with states and territories, the Government is implementing a strategic, nationally co-ordinated approach to development, integration and planning of Australia's critical infrastructure. That is why the Government established Infrastructure Australia. That is why the Government established the Building Australia Fund. That is why we have invested around $35 billion in nation-building projects across Australia, incorporating analysis by Infrastructure Australia.

INNOVATIONThe Government will invest up to $43 billion to construct and operate a National Broadband Network in partnership with the private sector.

THE network will provide all Australian homes, schools and workplaces the capacity to access the superfast broadband services necessary for productivity improvements across our economy. The network will help transform the Australian economy and facilitate the shift to more knowledge-based industries, as well as radically change the way businesses manage inputs, customers and resources. This digital revolution will arguably be the single greatest multiplier of productivity growth.

SKILLSCreating the best-educated, best-skilled, best-trained workforce in the world is a core element of the productivity agenda.

RESEARCH by the OECD shows that if average education levels of the working-age populations were increased by one year, the economy would be 3 to 6 per cent larger.

The need to plan properly and flexibly for our future skills needs explains the creation of Skills Australia by the Government.

That is why we are also investing in an Education Revolution, including a massive quantitative and qualitative improvement in our investment in early childhood education, in TAFEs and productivity training places, in university and in research.

In its first five years, the Government will increase total investment in human capital formation by about 50 per cent. And about a third of the Government's economic stimulus investments are focused on schools, TAFEs, universities and research institutions — to help build the education revolution.

TAXConsistent with achieving a modern tax system that is internationally competitive, provides maximum reward for effort, supports job creation and encourages productive investment, the Government has initiated a comprehensive review of how Australia's tax-transfer system might best be shaped for the 21st century.

WE NEED to ensure our tax system remains internationally competitive. As a capital importing country, we need to be mindful of the impact domestic tax laws have on global investment decisions and our ability to attract investment and international business. This is a key focus of the tax review, which aims to report at the end of the year.

BROADER REFORM AGENDAThese five sets of reforms will complement the broader program of policy reform the Government is implementing to address the long-term economic challenges to our nation, including demographic change, savings and retirement income, health and ageing, climate change and water.

RETIREMENT INCOME POLICYFor 20 years, Australian Labor governments have been committed to increasing our national savings including through Australia's compulsory superannuation system, implemented in the early 1990s.

NATIONAL savings are critical to two looming national challenges: to increase domestic investment and reduce our foreign private debt; and to alleviate fiscal pressures associated with an ageing population. Over the next 40 years, the number of Australians aged over 65 will grow from 13 per cent to 25 per cent of the population.

To preserve their standard of living, it is necessary to encourage savings from an early age and to improve the efficiency and investment returns of our retirement-incomes system. The Government has initiated a review into the governance and structure of Australia's superannuation system and made retirement income a major focus of our broader review into the tax system.

HEALTH AND AGEINGThe ageing of the population, the explosion in chronic diseases and the rapidly increasing cost of medical treatment create deep challenges for Australian and other Western governments wrestling with the overall cost and capacity of their health systems.

ON CURRENT trends, and without policy change, health-care spending will increase from 9.3 per cent of GDP in 2002-03 to 12.4 per cent in 2032-33 — a 33 per cent real increase. Commonwealth expenditure on health and residential aged care is scheduled to almost triple — from $48 billion to $124 billion a year.

These increases not only deprive other areas of budget investments, but reflect a wider cost to the economy. The Productivity Commission has argued that if we improved health promotion and disease prevention alone, about 100,000 deaths could be avoided and 175,000 extra people could be added to the workforce by 2030.

That is why the Australian Government has begun a major program of national health reform through the new Australian HealthCare Agreement, which, for the first time, entrenches outcomes measurements as a basis for payments to the states. And while these payments increase 50 per cent over the next five years, reform of long-term health, hospital and aged care has barely begun.

That is why the upcoming National Health and Hospitals Reform Commission report on future roles, responsibilities and resourcing of the Australian health system represents such important reform for the economy and the nation.

CLIMATE CHANGE AND WATERViewed through the prism of growth and competitiveness, action on climate change is a strategic opportunity.

IN A world with a global carbon price, carbon efficiency will also become a new competitive battleground. Those economies which offer a more energy efficient operating environment will become increasingly more attractive places to invest. Economies that refuse to act on climate change will run the risk of retaliatory tariffs from others.

Modelling from Treasury suggests that, by 2050, the output costs for economies that act early are 15 per cent lower than countries that wait for the world to act together.

That is why the Government is committed to introducing the Carbon Pollution Reduction Scheme, which will put a price on carbon to drive the transformation we need to a low-pollution economy.

Because of climate change, southern Australia has shifted from relative water abundance to water scarcity. We need to use water more wisely and efficiently. We cannot continue to rely on rainfall; we will need to source water in new and innovative ways.

The Government has taken the first step towards changing management and water use in the Murray Darling Basin. Reforms are aimed at a sustainable future for our water-dependent industries, like food and fibre. We are also working to ensure that Australian towns and cities are more resilient to the risks climate change poses for our urban water supplies.

DIFFICULT ADJUSTMENTS FLOWING FROM A RECOVERYEconomic crises contain a paradox of recovery. As growth returns, the economic conditions facing many families will deteriorate. For some time after the worst period of the crisis, Australians will feel ongoing financial pressures and in some areas, increased economic pain. Not least because employment is a lagging economic indicator, not a leading one.

THE shift from crisis to recovery will bring with it one of the most significant changes in global and domestic economic policy settings Australians have experienced. While the return to growth is welcome, it will involve a challenging adjustment.

Unemployment will continue to rise even after growth returns. On average in recent economic crises, unemployment has peaked 13 months after growth turns positive. The budget forecasts unemployment to reach 8.5 per cent by June 2011. It will not be until after a substantial period of growth that businesses feel confident to hire workers in sufficient numbers to make a dent in unemployment.

Over the next 18 months, rising growth will inevitably cause interest rates to rise off their record lows. In the last 18 months, interest rates have fallen from historic highs to record lows. As a result of the cuts in official rates of 4.25 percentage points over the past nine months, the average family with a mortgage of around $300,000 have an extra $6000 in their bank accounts. As the recovery progresses, economists are already telling us that rates will rise, putting additional financial pressure on many families.

Third, as the global economy improves, demand for commodities will pick up, causing prices to rise. For Australia, this will be a double-edged sword: providing a boost to our exporters but over time potentially inflicting higher food and petrol prices on many Australian working families.

Fourth, the Government's strategy to return the budget to surplus will involve some painful and unpopular decisions that will affect many Australians. As the private sector was in retreat last year, the Government acted responsibly to step in and stimulate the economy through an expansion of the budget. But in the recovery phase, the opposite will be true as the Government appropriately withdraws as the private sector expands.

These four pressures will hit Australian families just as they begin to feel the first benefits of recovery. However, despite the fact that the recovery will be long and tough, with lots of bumps along the way, the Government is confident Australia will emerge with a stronger, more stable and more prosperous economy.

Throughout this crisis, part of Australia's success has been built on our capacity to come together as a nation. Workers, employers, unions, small business people and governments. And that has been because we are all in this together. We have all pulled together. We have all made tough choices. Ones involving sacrifices to see our families and a nation through this crisis.

But we will also have to make tough choices ahead. And Australians will need to draw on that same unity of purpose as we face the new challenges of recovery — including the fundamental challenge of laying solid economic foundations to see Australia through the decade ahead.

If we succeed, economic historians of the future might indeed describe this as "The Building Decade".